* Government keen to tap investor appetite for higher yields
* Dollar-denominated 10-year bond may price Thursday-sources
* Paraguay seen paying similar rate as neighboring Bolivia
By Mariel Cristaldo and Joan Magee
ASUNCION/NEW YORK, Jan 16 (Reuters) - Paraguay will try to take advantage of investor appetite for higher yielding debt by selling up to $500 million in 10-year bonds as early as Thursday in its glo bal ma rket debut, sou rces familiar with the deal said.
Paraguay, one of South America's poorest and most unstable nations is expected to see a strong economic rebound this year and the center-right government is keen to tap inc reased investor interest in smaller emerging market issuers.
The country, which billed the issue as its first in international markets, is offering to pay about 5 percent interest on the dollar-denominated debt, the sources, who asked not to be named because the deal has not been concluded, said.
The planned debt sale would follow the example of neighboring Bolivia, another newcomer to global credit markets that sold $500 million in 10-year bonds at par to yield 4.875 percent in October.
"Given the number of similarities between the two economies -- both being open commodity-based economies with similar ratings -- we think that Bolivia's issuance would serve well as a comparison for pricing for a new bond from Paraguay," Barclays Capital said in a briefing note this week.
"In particular, the indebtedness is very low compared with other names in the region, this is clearly a positive catalyst for flows into the new issue," it added.
Paraguay's total public debt accounts for about 11 percent of gross domestic product (GDP), less than most of the countries in the region, and the central bank's foreign reserves have risen steadily in recent years to almost $5 billion -- equivalent to 19 percent of GDP.
The agriculture-dependent economy shrank 1.2 percent last year due to a poor soy harvest and a foot-and-mouth disease outbreak that hit beef exports, but the central bank expects a 10.5 percent bounce in 2013.
A record soybean harvest is forecast and the country has won back former markets for its beef exports. However, despite this year's more optimistic economic outlook, Paraguay faces many challenges.
Almost a third of country's 6.5 million people live in poverty and only Bolivia has a lower GDP per capita in South America. Th e landlocked nation is considered one of the world's most corrupt countries and political instability haunts its young democracy.
Last year, former President Fernando Lugo was ousted in a lightening-quick impeachment process that critics and governments in neighboring countries said was tantamount to a coup.
Current President Federico Franco was sworn in to head the government until a presidential election due on April 21 that will likely pit two center-right candidates.
Central Bank chief Jorge Corvalan told Reuters last year Paraguay was not simply aiming at a one-off issue but wanted to "build a closer future relationship with the markets."
The soy- and beef-exporting nation last issued debt abroad in 2000 when it sold $400 million of debt in a direct sale to two banks in Taiwan, with which Paraguay has diplomatic relations.
Paraguay hired the investment-banking units of Bank of America Corp and Citigroup Inc to handle the issue, which is rated Ba3/BB/BB- respectively by Moody's, Standard & Poor's and Fitch, sources familiar with the deal said.